Weekly Update: Mother (!) Nature

09-22-2017

Have you seen “Mother!”? Whoa. It made me nauseous, and I want to go back and see it again. A crazy movie and I’m a huge Jennifer Lawrence fan. But when asked in an interview in London why the film’s director said “it’s a mad time to be alive,’’ she talked about climate change, hurricanes, Mother Nature’s wrath and the outcome of last year’s election. She didn’t come right out and blame President Trump as some news sites suggested, but it’s not a stretch to draw that conclusion. Come on, lady. You are going to be a billionaire someday. Contain yourself!  Mother Nature is certainly wreaking havoc, with another Category 5 hurricane in the Caribbean and major earthquakes in Mexico City and off the Japanese coast just this week. She’s already being blamed for the bad data that’s starting to trickle in as a result of Harvey and Irma (see below). But payroll job growth was decelerating before the storms hit, as were real retail sales. Growth forecasts for the year are likely to be downgraded, not that anyone is remotely talking recession. Business Roundtable optimism about the outlook is at its highest level in three years, with hiring plans at a 6-year high. It’s time to look toward 2018. The hurricanes did a lot of damage, and the rebuilding on top of what looks to be a fiscally accommodating Congress—Republican deficit hawks this week appeared ready to back a $1.5 trillion tax cut (see below)—could be a one-two punch for growth. Hurricanes clearly appear to be getting more and more costly; in inflation-adjusted dollars, six of the past seven costliest occurred in the past 12 years.

Putting aside the theory that global warming is causing hurricanes to be more intense than usual, Ned Davis says it makes sense that one reason hurricanes are becoming more expensive is soaring population growth along Sunbelt state coasts. By 2030, the Census Bureau projects the combined population of Texas and Florida, the nation’s No. 2 and 3 most populous states, will top 60 million. They’re not just retiree magnets; they’re hurricane magnets, too. The average pattern of the S&P 500 after costly weather events mirrors other crises, with a sell-off for a few months, a rebound and a return to pre-crisis levels about six months later, Ned says. In analyzing sector performance after the eight costliest disasters, Industrials tended to have the highest outperformance six months out, while Technology outperformed in six of the eight cases 12 months out. Of course, the difference this time is we really haven’t seen any post-hurricane weakness, even though the stock market is in the middle of what historically is its weakest seasonal period. After a brief 2.2% mid-August pullback—to date, among the smallest fall corrections on record—the S&P along with other major indexes have been hitting record highs again. The biggest year-to-date correction was just 2.8%, from March 1 through April 13.

I spent part of the week in Wisconsin, just south of Milwaukee, where “everybody is concerned,’’ an advisor said. Another advisor said his clients seem to only be asking about bitcoin and gold. And yet another advisor reported his clients are stymied to invest their cushion of cash into stocks as the market makes new highs, saying that, “It’s easier to jump out of sinking ship than a soaring plane.’’ “The No. 1 fear is putting money into a market that hasn’t had a 5% correction in so long”—the last one ended on June 27, 2016, in the aftermath of the Brexit vote, making this current non-5%-pullback period the longest since 1996 and the sixth-longest on record. Meanwhile, technicals from breadth to moving averages to the direction of moving averages remain positive. As long as they are healthy, any correction should be viewed in the context of cyclical bull market. What could bring this uptrend to an end? Historical comparisons with other low volatility periods, including the mid-1960s, mid-1990s and mid-2000s, show volatility eventually rose and markets went into a downtrend after the Fed completed a tightening cycle. By this measure, it’s still early. At this week’s meeting, policymakers as expected unveiled a modest balance-sheet unwinding program and a lower neutral rate, leaving a December rate increase on the table and up to three more next year. Jennifer Lawrence, I love you! But I’m not interested in your politics. Perhaps you, dear readers, didn’t see the Emmys last weekend—ratings matched last year’s all-time low. But I did—I like to see the ladies gowns. It’s too bad that the audience was also treated to political commentary throughout the broadcast. Can’t Hollywood keep its opinions to itself, please? I agree that “it’s a mad time to be alive,’’ but to connect politics with Mother (!) Nature’s 2017 wrath is crazier than that movie I just saw!!! I think it’s time for some popcorn.

Positives

Starts and permits surprise In what may be the last relatively clean read for months, total housing starts fell less than expected in August, July was revised up significantly and single-family starts jumped to near February’s cycle high. Permits were robust, rising nearly 6% in August to match January’s 2-year high. While it appears it was too early to gauge the hurricanes’ impact on starts, Harvey and Irma did weigh on homebuilder sentiment in September, as confidence declined more than expected on intensified concerns about a lack of construction labor and high building material costs.

Manufacturing signals expansion The Philly Fed’s manufacturing index jumped in September, signaling an improving economy, with a significantly stronger reading than the consensus call for a decline, as new orders and shipments improved.  Although the reading remains below February and May highs, it is still well within the expansionary territory and is consistent with manufacturing activity in the mid-Atlantic region. Prices also rose, which points to a healthy pick-up in inflation. The “flash” manufacturing PMI also edged up in September.

Other signs of growth The Conference Board’s Leading Economic Index (LEI) increased 0.4% in August, up for the 12th straight month, and above the consensus of 0.3%, suggesting “economic activity will continue throughout the remainder of the year, with some upside potential possible.” Seven of 10 of the index’s components made positive contributions, led by building permits, while two were steady, and only one (initial jobless claims) declined. On a year-over-year (y/y) basis, the index was up 4.4%, the most since June 2015, and double the gain per annum historically, as the pace of the expansion has gained steam.

Negatives

Hurricanes hit home sales Existing sales fell for the fourth time in five months and by more than expected in August, with the biggest drop-off coming in the South. Sales actually rose in the Northeast and Midwest. The August decline lowered the y/y gain to just 0.2%, with September also certain to be hit even harder given the massive devastation in the nation’s second and third most populous states. Mortgage-purchase applications also fell in the latest week to nearly a 3-year low, thanks to Harvey and Irma as well as the Labor Day holiday. The National Association of Realtors expects demand to normalize by early 2018. Home prices moderated, as the FHFA Purchase-Only House Price Index picked up 0.2% in July, the second smallest gain since January 2015. Price changes over the month were mixed by region, but all were higher than a year ago.

Inflation watch Cross-border inflation pressures picked up last month as both import and export prices posted 0.6% gains that easily beat forecasts. Petroleum prices played a role, surging in part on pressures related to Harvey. But other prices also chalked up solid gains, with export prices for industrials particularly strong. Y/y, import and export prices accelerated 2.1% and 2.3%, respectively, echoing August’s perkier core CPI readings.

Services outlook slows The Empire non-manufacturing activity gauge slipped but was still expansionary this month, as survey respondents viewed the business climate as worse than normal.  The expected activity component fell for the fifth time in the past six months to its lowest level since last November on waning near-term optimism.  Friday’s services “flash” PMI also dipped in September, although August’s reading was the highest in 21 months.

What else

Political watch Tax-reform legislation is beginning to stir as two central themes come into focus: the bill will not be revenue-neutral and will reject significant tax cuts for the wealthy—including abolition of the estate tax, which is rapidly losing support. The desire for a tax bill is so intense among Republicans that the party's longstanding opposition to higher deficits is wavering. That was the clear message as the Senate Budget Committee began work on a budget resolution authorizing tax cuts. It would lose revenue on paper but would assume much stronger economic growth, theoretically gaining revenues in the long-term. This could be a decent-sized tax cut, lowering corporate and individual rates, adding to growth just as the midterm elections approach.

Cheesehead Nation Green Bay is the smallest NFL market but the Packers are among the top 10 revenue-generating teams. Cheeseheads, as Packer fans proudly call themselves, will drive three hours from Milwaukee to get to a game and four to five hours to get back, what with the traffic. Seriously loyal fans! In 2011, I watched my hometown Steelers lose to the Packers in Super Bowl XLV in Dallas. Otherwise, it was a great time as the Cheeseheads were gracious in our defeat.

Let’s close this gap quickly; I’m not getting any younger The female-to-male earnings ratio shrank last year, reaching 80.5%, according to the Census Bureau. Wages are stagnating for men, while pay is rising for certain groups of women.

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